middleware

“In 2017, we will exit our Annualized Recurring Revenue (ARR) between $24.5 — $25.5M, a growth of 52%, up from 46% growth the previous year. Our gross margin for the recurring business is 88%, and will increase in coming years. In 2017, we will turn our first profit with $603K EBITDA and generate $2.7M cash from operations.”
Original source: WSO2: Our 2017 Results and 2018 Plan

The San Francisco-headquartered business revealed it pulled in $187.7m last year, up 170 per cent from its $110.3m in revenue in 2015. Gross profits were just over $138m from $78m, and net losses decreased to a piddling $49.6m, down from $65.4m the year before.

Figuring out the market for PaaS has always been difficult. At the moment, I tend to estimate it at $20-25bn sometime in the future (5-10 years from now?) based on the model of converting the existing middleware and application development market. Sizing this market has been something of an annual bug-bear for me across my time at Dell doing cloud strategy, at 451 Research covering cloud, and now at Pivotal.

A bias against private PaaS

This number is contrast to numbers you usually see in the single digit billions from analysts. Most analysts think of PaaS only as public PaaS, tracking just Force.com, Heroku, and parts of AWS, Azure, and Google. This is mostly due, I think, to historical reasons: several years ago “private cloud” was seen as goofy and made-up, and I’ve found that many analysts still view it as such. Thus, their models started off being just public PaaS and have largely remained as so.

I was once a “public cloud bigot” myself, but having worked more closely with large organizations over the past five years, I now see that much of the spending on PaaS is on private PaaS. Indeed, if you look at the history of Pivotal Cloud Foundry, we didn’t start making major money until we gave customers what they wanted to buy: a private PaaS platform. The current product/market fit, then, PaaS for large organizations seems to be private PaaS

(Of course, I’d suggest a wording change: when you end-up running your own PaaS you actually end-up running your own cloud and, thus, end up with a cloud platform.)

How much do you have budgeted?

With this premise – that people want private PaaS – I then look at existing middleware and application development market-sizes. Recently, I’ve collected some figures for that:

IDC’s Application Development forecast puts the application development market (which includes ALM tools and platforms) at $24bn in 2015, growing to $30bn in 2019. The commentary notes that the influence of PaaS will drive much growth here.

Recently from Ovum: “Ovum forecasts the global spend on middleware software is expected to grow at a compound annual growth rate (CAGR) of 8.8 percent between 2014 and 2019, amounting to $US22.8 billion by end of 2019.”

When dealing with large numbers like this and so much speculation, I prefer ranges. Thus, the PaaS TAM I tent to use now-a-days is something like “it’s going after a $20-25bn market, you know, over the next 5 to 10 years.” That is, the pot of current money PaaS is looking to convert is somewhere in that range. That’s the amount of money organizations are currently willing to spend on this type of thing (middleware and application development) so it’s a good estimate of how much they’ll spend on a new type of this thing (PaaS) to help solve the same problems.

Things get slightly dicey depending on including databases, ALM tools, and the underlying virtualization and infrastructure software: some PaaSes include some, none, or all of these in their products. Databases are a huge market (~$40bn), as is virtualization (~$4.5bn). The other ancillary buckets are pretty small, relatively. I don’t think “PaaS” eats too much database, but probably some “virtualization.”

So, if you accept that PaaS is both public and private PaaS and that it’s going after the middleware and appdev market, it’s a lot more than a few billion dollars.

“Global analyst firm Ovum forecasts the global spend on middleware software is expected to grow at a compound annual growth rate (CAGR) of 8.8 percent between 2014 and 2019, amounting to $US22.8 billion by end of 2019.”

The simple assumption, is 40-60% of the time somebody says “let’s implement a rules engine to solve these unknown problems” really translates to “we really don’t know much about this domain so let’s implement something arbitrary as a stop gap”.

PaaS has always had the issue of being “big next year.” The nature of PaaS has shifted around so many times that it’s little wonder it’s yet to achieve escape velocity. To my mind, PaaS has come to mean “integrated middle-ware and services developers use to run cloud applications,” and in that sense I think PaaS will have an interesting year in 2014. The tools and practices behind DevOps are reaching mainstream, and the fast rise of things like Docker and mainstream hocking of Cloud Foundry are all encouraging. I still think PaaS needs to evolve to something close to that looser middle-ware-as-a-service definition than the clearly defined and contained platforms we’ve seen in years past. One thing is for sure: developers are going to keep writing application destined to live on the cloud to support web and mobile apps. It’s unclear if they’ll chose classic ideas of PaaSes (Heroku, etc.) over assembling their own middle-ware stacks with the help of things like Chef, Puppet, and Docker.

Everything I hear from the buy side of the market indicates that they’re hungry for better ways of developing and delivering cloud applications (whether to support classic web apps, mobile, or analytics applications). To me, this means a big uptick in spending in the middle-ware and developer categories, or the PaaS part of the cloud market. Companies like Pivotal Labs are premised on this opportunity, and numerous other vendors seem convinced as well.

Q: From Forbes: “Platform-as-a-Service (PaaS) will attain a 41% CAGR through 2016, generating 24% of total cloud revenues. 71% of PaaS revenues will be generated by vendors over $75M in sales according to the study.” Does 451 still stand by these numbers?

As Greg Zwackman put it in Paul’s article:

Analysts at 451 Research also see improved prospects for PaaS. “For 2013, we are projecting well over 50 percent growth over 2012,” says 451 analyst Greg Zwakman. The research firm expects PaaS usage to grow 41 percent each year through 2016, to account for 24 percent of total cloud revenues.

My reply: I believe this segment of the market will grow fast and be a large part of spend. It’s clear that deploying custom written software is a large part of what cloud is used for, and developers are always looking for better mouse-traps. Also, included in these numbers if I’m right, are ALM (Application Life-cycle Management) and supporting services and tools. From what I can tell, developers are eager to move to cloud-hosted versions of these tools, and vendors like IBM are starting to respond as well.

Q: How does 451 define PaaS?

Here’s the official definition: “A PaaS is a cloud-enabled development platform designed to let developers interact with code and create running applications, without maintaining or operating the runtime.”

And the longer definition:

“PaaS is defined as a remotely hosted framework that supports the building, deployment and ongoing management of applications throughout their life-cycle (development, testing, deployment, runtime, hosting and delivery). PaaS provides the computing environment on top of the infrastructure where multiple applications share a single plat- form for development and deployment. It also provides all the tools necessary to build and deploy applications and services via a Web browser, and offers user-friendly functionality streamlining workflow collaboration and speeding up production and time to market. Included in this category are vendors that provide the entire stack of PaaS functionality and partner with third parties (i.e., hosters) for the infrastructure component, as well as those vendors that provide the infrastructure themselves. Cloud computing components of the PaaS marketplace we track include: PaaS From SaaS, Stand-Alone PaaS and Application Life-cycle Management as a Service (ALMaaS). Within the ALMaaS space, we categorize vendors in two sub-sectors: Pre-Production & Testing and Integration as a Service.”

Q: What’s next for PaaS in 2014?

This year the PaaS market needs to decide if the Cloud Foundry approach (a very loose, buffet of services that interlock together, reminiscent of J2EE vs. the more clearly defined approach you’d get on AppExchange or even Heroku) is the winner. Also, how something like Docker fits in, and by extension the idea of using Chef, Puppet, AnsibleWorks, and Salt instead of a PaaS are important. Put another way: do developers want to build their own stacks and control the configurations of them, or do they want to deploy into a more clearly defined “app server,” to use a Java analogy.